Crypto Taxes: How Will They Fill the Fiscal Gap?
Hello and welcome to Protocol Fintech. This Wednesday: the ongoing crypto tax nightmare, Silvergate revenue and a fight over the definition of “exchange”.
out of the chain
Block is all about crypto, right down to the name. But the company seems to have recently recalled the importance of its original business, Square. A new square bracketnine years after the original helped the payment startup transcend its dongle origins, comes with software improvements and international expansion. That might be enough to distract from the nervousness about the After-payment the acquisition and this shareholder lawsuit about Tide Agreement: Bulk shares, which have halved in the past six months, rose more than 5% on Tuesday.
—Owen Thomas (E-mail | Twitter)
The Crypto Tax Question
Think it’s safe to stop thinking about crypto taxes, now that reporting season is over? Think again. Crypto has grown tremendously over the past few years, which means it will likely make up a bigger part of the tax picture for more consumers. And crypto taxes have proven to be a point of contention for lawmakers, as they tread the tricky path of figuring out how to get part of a booming financial sector from government without burying it with regulation.
Crypto taxes have seen explosive growth and there are no signs of slowing down. According to statistics from TurboTax, the number of people who made crypto transactions nearly quadrupled between tax year 2019 and 2020, up 362%.
- Numbers for 2021 are not yet available, but since it was a big year for crypto, it is safe to expect the number to increase even more in the last tax year.
- Millennials make up nearly 40% of filers reporting crypto transactions, but the percentage of Gen Z crypto filers has increased from 14% to 17%, signifying a continued shift in demographics as the popularity of cryptography increases.
- Kristin Smith, executive director of the Blockchain Association, told Protocol that it’s also natural that Gen Z consumers are increasingly interested in crypto because of their understanding of the internet. “It’s a way for them to control their assets in a way that they just can’t do with other types of investments,” she said.
The United States is considering crypto as a source of income. With the Biden-backed Infrastructure Investment and Jobs Act and proposed budget for fiscal year 2023, the White House is looking to crypto to fill a revenue gap.
- The infrastructure law passed last year targets cryptocurrency tax reporting requirements, mandating annual reporting for digital asset brokers. While this makes taxes easier for crypto investors, crypto businesses will now have additional charges.
- Crypto lobby groups still believe that tax reporting requirements remain unclear, particularly on the definition of “brokers,” and want Congress to clarify in hopes that they will limit the definition to centralized exchanges.
- “What we don’t want is other entities that are very important to the process, but don’t actually have customer information…to suddenly put them on the hook for this kind of requirements,” Smith said.
- She added that there are still unresolved issues regarding crypto lending and staking rewards that require further clarification from the IRS.
Lawmakers themselves are still figuring it out. There seems to be a fine line between wanting to cash in on the thriving crypto industry and reap its economic benefits, and restricting it through regulation.
- While new crypto tax requirements could bring up to $28 billion over the next decade, a tougher crackdown on crypto through tax rules could be seen as suffocating. There are examples abroad.
- India’s crackdown on crypto taxes has led to a significant decrease in crypto trading volume and even caused the downfall of its largest crypto exchange, WazirX. move its headquarters in Dubai looking for friendlier tax laws.
- The new capital gains tax of 30% on crypto transactions, along with a 1% withholding tax, proved too high for India’s booming crypto sector.
- Republicans in Congress introduced the Keep Innovation in America Act, which would define the term “broker” so that entities without customer information would not be bound by tax reporting requirements. He has Democratic co-sponsors, including Bay Area Representatives Eric Swalwell and Ro Khanna.
- the Virtual Currency Tax Fairness Act also gained significant bipartisan support.
Digital assets are here to stay and lawmakers need to act faster. The crypto sector seems ready to pay its fair share of taxes. But the complexity of tax reporting for certain types of transactions – like NFTs purchased in blockchain games – is already burdensome. General simplification seems overdue, as well as clarity on rapidly changing areas such as crypto rewards and staking. It’s bad enough having to shell out money in April. Not knowing how much you owe makes tax season so much worse.
—Lindsey Choo (E-mail | Twitter)
A MESSAGE FROM PwC
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on the money
On protocol: Mastercard’s Raj Dhamodharan is not afraid of blockchain. Instead, he sees a lot of opportunity.
Silvergate Bank recorded a 93% increase in revenue. In his call for first quarter resultsThe crypto-focused bank reported a significant year-over-year increase in revenue, but saw a significant drop in the dollar value of transfers on its Silvergate Exchange Network, used by its institutional crypto clients to move fiat money.
IMF thinks Russia could use bitcoin mining to evade sanctions. The International Monetary Fund said in a report that bitcoin mining could allow countries to “monetize energy resources”, but argued that the scale of the evasion could be contained.
The Secret Service has seized over $102 million in crypto since 2015. The federal agency said the nature of blockchain allows tracking wallet addresses in investigations, leading to the seizure of over $102 million in 254 cases to date.
FTX’s derivatives proposal will be heard by the CFTC on May 23. Following the close of the 60-day public comment period on May 11, the CFTC will hold an informal hearing for the FTX proposal to directly clear the transactions of its derivative clients.
Indian Minister of Finance Nirmala Sitharaman believe the biggest risk of crypto is its potential use for money laundering, but there is no surefire way to regulate it yet. “I think regulation using technology is the only answer. Regulation using technology will have to be so adept that they must not lag behind, but be sure they are above it,” she says at a seminar.
the DRY The battle with the crypto industry over the definition of “exchange” is far from over. “Far from being technologically neutral, these changes will serve to entrench incumbents who have inherited centralized business models and amount to a de facto ban on the decentralized finance models that have sprung up,” Digital Delphi General Counsel Gabriel Chapiro tweeted.
Apollo CEO Marc Rowan believe the blockchain industry will revolutionize finance. “A lot of the rails or the technologies or the platforms or the systems that support what’s happening in NFT are actually the precursor to changes in our financial system and we ignore them at our peril,” he said in an interview with Bloomberg.
Just a question for…
Céline Dufétel, Chief Financial Officer, Checkout.com
What is your view on crypto payments?
We definitely believe in the space and believe in serving those customers and making sure our capabilities are strong in the space. That being said, we don’t believe cash or credit cards are going away, and the world will have multiple ways to transfer value. If you look at our merchants today, we don’t see any immediate demand to accept this payment method right away, but it’s certainly a capability that we believe could be relevant over time.
Then there are other things like being able to install stablecoin merchants for example, which are capabilities that we are investing in and building on. One of the cool things is the 24/7 option to tune compared to what you can do with fiat.
A MESSAGE FROM PwC
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Thanks for reading – see you tomorrow!